(Bloomberg) -- China’s slowing economy and clogged policy transmission are adding to the urgency of a reform of the country’s interest rates in order to lower borrowing costs.
With the economy about to post the slowest pace in years, economists from Bank of China Ltd to Citigroup Inc (NYSE:C) and Everbright Securities expect the central bank to accelerate a long-mulled revamp to simplify the complex array of interest rates.
“The need to reduce real borrowing costs for companies and lift domestic demand is pressing, but the room for more easing is limited,” said Fan Ruoying, an analyst at the Bank of China’s Institute of International Finance in Beijing.
The dilemma gives policy makers little choice but to push for the so-called market-oriented reform of interest rates, she said, hoping to “unclog the transmission and make stimulus measures pass through better.”
A State Council meeting on June 26 discussed how to deepen the interest rate reform as part of the efforts to lower borrowing costs this year, indicating the plan is in the last stages.
Policy makers are struggling to generate demand for bank loans as growth slows, partly because of the shortcomings of the current two-track interest rate system. Amid concerns that broad easing via cuts to the benchmark one-year lending rate could weaken the yuan and inflate asset bubbles, officials have kept that rate on hold and instead funneled cheaper liquidity to banks -- without that cash being able to flow readily to the real economy.
Policy makers have long telegraphed their intention to reform the system, and the situation became more pressing this month when the overnight repo rate fell to the lowest level since at least 2003, breaking the floor of the central bank’s interest rates corridor.
“The issue now is that monetary policy isn’t being transmitted effectively, and the interest rates for loans remain high,” said Wang Yifeng, analyst at Everbright Securities Co. in Beijing.
For now, details about the reform are scarce, but clues are available in officials’ comments. PBOC Governor Yi Gang indicated in May that the PBOC will likely scrap the benchmark lending rate while keeping the deposit rate in the early stages of the reform.
Policy makers will likely make the Loan Prime Rate -- the price banks offer to their best clients -- more closely linked to the rate of PBOC’s mid-term loans, or the Medium-term Lending Facility, according to Everbright’s Wang.